Last-minute tax changes could affect millions of taxpayers

Congressional action -- or inaction -- on the impending fiscal cliff could extend the reach of the Alternative Minimum Tax and boost taxes for millions of individual taxpayers, corporations, estates and trusts.

The AMT originally was designed to prevent rich people from avoiding taxes but later expanded to include wage earners across the economic spectrum when George W. Bush-era tax cuts went into effect.

Unless Congress steps in with a last-minute change, the AMT is scheduled to revert to 1986 levels for the 2012 tax year, affecting 25 million taxpayers.

The AMT represents the big dog of tax provisions that are set to expire at the end of 2012, but it's hardly the only one likely to hold up the returns of millions of American taxpayers.

"If Congress does not get a resolution quickly, the IRS would not be able to begin processing tax returns until March," said Peter Diaz, a Redwood City certified public accountant.

After much talk, Congress also has yet to act on the so-called Section 179 tax deduction that currently allows writing off business expenses up to $139,000. Congress, so far, has avoided pressure to set the limit back to the 2011 level of $500,000.

"Congress hasn't done anything to increase that, but they could change it retroactively," Diaz said.

Congress also could extend a whole host of credits and deductions, including: energy-efficiency credits for home manufacturers; energy-efficiency credits for appliance manufacturers; energy-efficiency tax credits for homeowners; deductions for schoolteacher supplies; sales tax deductions on state income taxes; and deductions on mortgage insurance premiums.

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And even more confusion is expected next year:

An overall limit on itemized deductions for higher-income taxpayers will go back into effect next year.

That means most itemized deductions -- except for medical and dental expenses, investment interest and casualty and theft losses -- will be cut by either 3 percent of adjusted gross income or 80 percent of itemized deductions, or whichever is less.

At the same time, a new 3.8 percent Medicare contribution tax on unearned income by individuals, trusts and estates is scheduled to go into effect next year as part of the Patient Protection and Affordable Care Act -- otherwise known as Obamacare.

Other tax changes affecting individual filers include an increase in the employee portion of the hospital insurance payroll tax, which will rise .9 percent on wages over $250,000 for married couples filing jointly or $200,000 for individuals.

And the maximum child credit will drop from $1,000 to $500 per child and cannot be used to offset the Alternative Minimum Tax.